India may slash bond taxes for foreign investors to align with global markets: Report

India is considering a substantial reduction in taxes levied on foreign investors buying Indian government bonds, according to a Bloomberg News report citing people familiar with the matter. The proposal is aimed at aligning India’s taxation framework with global standards and attracting higher overseas capital inflows into the country’s debt market.

The report said the Reserve Bank of India (RBI) has recommended the move and the Finance Ministry is seriously evaluating the proposal. Discussions around reducing the tax burden have reportedly gathered pace as policymakers seek ways to address pressure on the rupee and increase foreign participation in India's bond market.

The timing is significant, with the Indian rupee emerging as Asia’s weakest-performing currency in 2026, having declined more than 6% against the US dollar so far this year. Authorities are increasingly exploring measures that could support capital inflows and improve confidence among global investors.

MUST WATCH: FIIs Keep Selling, But Indian Markets Refuse To Crack — Here’s Why

MUST READ: How are Indian banks falling short in climate action?

India has recently taken steps to deepen integration with international financial markets. Government securities have been included in key global benchmarks such as JPMorgan’s emerging market bond index and FTSE Russell indices, developments expected to channel additional passive and institutional flows into Indian debt.

Despite these developments, foreign ownership in India’s sovereign debt market remains limited. Overseas investors currently hold just 3% of India’s $1.3 trillion government bond market, according to Bloomberg News.

MUST READ: SBI warns West Asia crisis impact yet to fully reflect in India’s inflation data

One factor frequently highlighted by investors is taxation. Foreign buyers currently face capital gains taxes depending on investment duration and jurisdiction. Interest income from bond coupon payments is also taxed at around 20%. Earlier, overseas investors benefited from a concessional 5% tax rate on interest earnings, but that regime ended in 2023.

Market reaction to the report was positive. The rupee reversed earlier losses while government bonds gained. The benchmark 10-year government bond yield reportedly fell by as much as five basis points to 7% before recovering some ground.

However, analysts remain cautious. Bloomberg quoted Edwin Gutierrez, Head of Emerging Market Sovereign Debt at Aberdeen Investments, saying the proposal is positive but broader factors, including inflation concerns, continue to weigh on investor sentiment toward Indian debt.

The move could represent a broader effort to make India’s bond market more globally competitive while strengthening its appeal to long-term foreign investors.

MUST READ: RBI continues to bring more gold back to India. Here's why